1

Cost AccountingAdolph Matz

Milton F. usry

2 What is Accounting????

Accounting is a specialized information system that provides economic information to different group of people.

3 Branches of Accounting…

Financial Accounting

Cost Accounting

Management Accounting

4 Financial Accounting..

Primary function of financial accounting is to record in a systematic way money transactions between an economic entity and third parties such as suppliers, customers, employees, bankers etc.

Financial accounts provide information to “inside users (Management)” and “Outside users (shareholders, investors, trade unions, general public etc.)”

5 Definition:

Committee on Terminology of American institute of Certified Public Accountants

Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of a financial character and interpreting the results thereof.

Financial accounting (or financial accountancy) is the field of accounting concerned with the summary, analysis and reporting of financial transactions pertaining to a business.

6 Cost Accounting:

Institute of Cost and Management Accountants of U.K.

“The application of accounting and costing principles, methods and techniques in the ascertainment of costs and analysis of savings or excesses as compared with previous experience or with standards”.

It can also be defined as

Determining the costs of products, processes, projects, etc. in order to report the correct amounts on the financial statements.

7 Management Accounting:

The application of professional knowledge and skill in the preparation and presentation of accounting information in such a way as to assist management in the formulation of policies and in the planning and control of operations of the undertaking.

8 Tracing the Roots of Cost Accounting:

The practice of costing is as old as the business activity level itself.

After Industrial Revolution (1780) due to vast production, quantitative information became the need of management

During world war 1st (1914-1918) huge quantities of weapons were produced and sold at cost plus profit contracts.

The great Depression (1930s) also increased the need to determine cost more precisely.

9 Contributions of Cost Accounting: Planning Controlling Evaluation of Alternatives Inventory Management Pricing External Reporting Analysis of Financial Statements

10 Planning:

Process of setting objectives and steps needed to attain them

The plans are numerically expressed in the form of budgets

Budgeting is the area where contribution of cost accounting is most visible.

11 Controlling:

it is the process by which management makes sure that intended and desired results are consistently and continuously achieved. It consists of three steps:

i. Establishment of standards

ii. comparison of results against standards

iii. correction of deviation

Performance Report… Department A

Item Budgeted cost

Actual cost Variance Explanation

001 - - - -

002 - - - -

12 Evaluation of Alternatives:

whether it is less expensive to make or Buy a product

whether to continue or discontinue a product

cost accounting provides information as to how future costs and revenues will be affected under each alternative and help management to take decisions.

13 Inventory Management:

complete record of material from entering time to the time they are sold in the form of finished product

Stock Evaluation

valuation of work in process inventory

quantitative models for material planning and management developed by cost accounting

14 Pricing of products and Services:

determination of price of new products as well as adjustment of price of existing products

determination of bid price

15 External Reporting:

Detailed cost reports are prepared and presented in front of users

For example:

Reports prepared and presented in front of Assembly and Government regulatory agencies.

16 Analysis of Financial Statements:

Financial statements are analyzed by external users and management

Analysis helps to take decisions regarding profitability, financial strength and trend etc.

17 Comparison of Financial and Managerial Accounting

Financial Accounting Managerial Accounting

1. Users External persons who Managers who plan formake financial decisions and control an organization

2. Time focus Historical perspective Future emphasis

3. Verifiability Emphasis on Emphasis on relevance versus relevance verifiability for planning and control

4. Precision versus Emphasis on Emphasis on timeliness precision timeliness

5. Subject Primary focus is on Focuses on segments the whole organization of an organization

6. GAAP Must follow GAAP Need not follow GAAPand prescribed formats or any prescribed format

7. Requirement Mandatory for Notexternal reports Mandatory

18 Cost vs Financial Accounting:

Financial Accounting Cost Accounting

Information to external users Information to internal users

General purpose financial statements Special purpose statements

Conform to generally accepted accounting principles

Conform to information needs of management

Provides accounting data in monetary terms

Monetary and non-monetary terms

Financial statements are prepared on yearly or half yearly basis

Cost statements and reports are prepared more frequently i.e. weekly and daily basis.